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The iPhone App Store - a classic protection racket

30 per cent to the bag man

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Fail and You "Listen up, friend. We take care of the community. We all protect each other. You wanna set up shop in this neighborhood, you're gonna need some protection, you know what I'm sayin'? I mean, you got a real nice business here, nice store, nice people. It'd be a shame if something were to happen to it. Fire, robbery, these things happen all the time, but we can make sure they don't - at least to you. Let's say 30 per cent of your daily take? It's not in your best interest to say no to guys like us. It's bad for your health."

Does this shakedown sound familiar? If you're an iPhone developer, it should. When a developer sells an application through the iPhone Application Store, they only see 70 per cent of the revenue. The rest goes to Apple for “system upkeep.” There's no other way to sell iPhone apps. Apple's distribution channel is the only one. Users can't buy your program from their computer then load it onto an iPhone without jailbreaking the device, which is a gamble.

If you don't want to pay, well, let's not go down that road. After all, what good would a programmer be without his thumbs?

Two Years Ago, I Thought RICO Was A Relative Of His

This 70/30 split is actually a pretty classic extortion scheme. If you want to sell iPhone applications, you need to do it through Apple, and you need to accept these terms. For gangsters, the first step in the racket is to make the “clients” fully dependent on the mob, so crossing the mob is completely out of the question. At first, business is good. You sell your wares, and cut 30 per cent to the bag man. You feel only slightly uncomfortable with the whole situation, but you know that the mob has you by the balls. You hope that they will leave you alone as long as you keep paying. With such strong leverage, the mob can up your protection cost whenever they feel like it. And sooner or later, they'll feel like it.

What happens when Apple's 30 per cent vig becomes 35 per cent? What about 50 per cent? With nothing to stop them, Apple is in a great position to bleed developers dry. You can't take your business elsewhere, because there is no elsewhere.

Sure, there are good arguments for surrendering a big chunk of your revenue. With the centralization of the Application Store, your program gets plenty of exposure. You get a user-friendly distribution channel directly to the device. You get a payment processing system. I seem to remember another technology that solved these problems, though. Oh, right. It's the internet, in like 1996. The internet is the ultimate distribution channel for software, but it's unlikely that anyone will engineer the friction out of Apple's setup, because there's too much money to be made otherwise. Plus, Apple has a habit for making such problems disappear, if you know what I mean.

Sticking with the tradition of being the savior that nobody asked for, Google is trying to make mobile distribution easier for developers. If you develop an Android application, you can sell it through the Android Market under the same 70/30 split setup. However, users can install applications on their Android phones without using the store. Several developers have already taken advantage of this, considering that the Android Market isn't set up to take payments yet, as Google seems to have missed some of the finer points of free-market commerce.

Unfortunately, while Google asks a lot of hard programming questions to job candidates, they don't ask how the candidate would launch a consumer electronic device. It's pretty obvious that they just winged it and expected a single link from the google.com homepage to generate the kind of buzz that the iPhone got. With such a weak showing, it's no surprise that there's a general feeling of malaise among Android developers. This doesn't make a good case for potential iPhone refugees. Sure, they operate in the neighborhood run by gangsters, but as a result, the neighborhood is clean, generally safe, and has a lot of customers. Setting up shop in Google's part of town means that you're in the middle of a failed urban renewal. The retail space is nice, but the storefronts are empty, and the only customers are tourists who have outdated travel guides.

So what's a developer to do? Well, one option is suicide, but that may be a bit too extreme. The real problem is the asymmetrical gravity that developers have. More applications for Android doesn't mean more customers for Android, unfortunately. It's the other way around: The users hold all the cards. As long as the customers are lining up in front of the Apple store instead of the T-Mobile store, you pretty much have to bend over and take it.

For the time being, there probably isn't too much of a business risk in agreeing to Apple's terms. Despite the global recession, Apple is still pulling in plenty of scratch, and the evidence that Steve Jobs is alive is the strongest since the false announcement of his heart attack by the citizen-journalism brigade. Be that as it may, it's still possible for them to put the screws to developers. Earnings won't beat expectations forever.

A Bust-Out Is Like A License To Steal

The failing economy, however, may be the edge case that saves developers. Organized crime is one business that's recession-resistant. When things start to tank, gangsters rely more on gambling and prostitution than protection rackets. Shooting a broke guy in the knee is a net loss, because he's not going to come up with the money, and bullets are expensive nowadays. Software shops are cutting costs left and right (and by “costs,” I mean “employees”), so it's not in Apple's best interest to lean on them.

The next year is going to usher in the death of a lot of startups. While Apple's 30 per cent vig isn't likely to cause anyone to bite the dust directly, it's not going to help any profit margins. In the end, though, I suppose it's better to be laid to rest in public than unceremoniously in a hole in the desert. ®

Ted Dziuba is a co-founder at Milo.com You can read his regular Reg column, Fail and You, every other Monday.